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The ‘Gift’ Of Capital Gains Tax Relief

By Malcolm Finney, January 2014
Malcolm Finney provides some examples and offers a practical tip on an important CGT relief when making gifts of assets.

Capital gains tax (CGT) arises where a sale of an asset takes place. However, it also occurs where an individual makes a gift of an asset (e.g. a gift to another individual or into trust). For example, if Mary makes a gift of some shares she owns to her sister, Margaret, she will be liable to CGT on any gain she makes; for this purpose she is treated as having sold the shares for their market value. Mary may thus have a CGT liability even though she received no monies from the gift.

Hold-over relief is designed to ameliorate this possible problem.

How does hold-over relief work?

Hold-over relief works by deferring the capital gain on the part of the donor. In essence, the gain which the donor would otherwise have made is transferred to the donee.

Example 1 - Mary’s share gift to Margaret

Mary bought some shares for £4,000. Three years later, she gifts them to her sister, Margaret, at a time when they are worth £7,000.

Mary’s capital gain is (£7,000 - £4,000) i.e. £3,000.

Instead of paying CGT on this £3,000 gain, Mary and Margaret agree to allow Mary to claim hold-over relief.

This means that Mary is now deemed to have sold the shares for (£7,000 - £3,000) i.e. £4,000 in which case she has not made a capital gain (as the shares cost her £4,000). 

However, Margaret is deemed to have acquired the shares for £4,000 (not £7,000).

Effectively, what has happened is that Mary’s capital gain has been transferred to Margaret.

Example 2 - Margaret sells the shares

A year later, Margaret sells the shares for £8,500.

Her capital gain is (£8,500 - £3,000) i.e. £5,500.

This £5,500 is in essence made up of Mary’s £4,000 (non-chargeable) gain plus the growth in value from the date Margaret acquired the shares (value at that time £7,000) to the date of sale, i.e. £1,500.

Donor and donee need to agree
As the above examples illustrate, Margaret’s capital gain is greater than it would normally be as she has effectively taken on Mary’s capital gain. Mary therefore needs Margaret’s agreement to this. In practice, this means that a so-called ‘joint election’ is lodged with HMRC claiming hold-over relief. Both donor and donee must also be residents of the UK.

Does hold-over relief apply to all assets?
Unfortunately, hold-over relief is restricted and does not apply to all assets. It applies only if the asset is a ‘business asset’ or if ‘an immediate charge to inheritance tax (IHT) arises on the making of the gift’.

Business assets include shares of a trading (not investment) company not listed on a recognised stock exchange (eg shares listed on the alternative investment market (AIM)) or assets used for the purposes of a trade (eg John owns a factory which he uses in his trade of shoe manufacture; the factory would be a business asset). An immediate charge to IHT arises, broadly, where an individual transfers an asset to a trust or where a trust transfers a trust asset out to a beneficiary of the trust. 

Death and hold-over relief
If in the above examples Margaret dies having retained the shares, any capital gain held-over is wiped out. Thus, if at her death the shares were worth £8,500 and Margaret left the shares to her brother Bill, then Bill would inherit them at a cost of £8,500. If he sold them for, say, £9,500 he would make a gain of only £1,000; thus, Mary’s gain of £3,000, which was held-over, escapes any CGT charge completely (and any growth in the value of the shares whilst Margaret owned them is also outside any CGT charge).

Practical Tip:
If you wish to make a gift of an asset to which hold-over relief applies, but the capital gain would be less than your unused annual exempt amount (£10,900 for 2013/14), don’t claim hold-over relief. 
Malcolm Finney provides some examples and offers a practical tip on an important CGT relief when making gifts of assets.

Capital gains tax (CGT) arises where a sale of an asset takes place. However, it also occurs where an individual makes a gift of an asset (e.g. a gift to another individual or into trust). For example, if Mary makes a gift of some shares she owns to her sister, Margaret, she will be liable to CGT on any gain she makes; for this purpose she is treated as having sold the shares for their market value. Mary may thus have a CGT liability even though she received no monies from the gift.

Hold-over relief is designed to ameliorate this possible problem.

How does hold-over relief work?

Hold-over relief works by deferring the capital gain on the part of the donor. In essence, the gain which the donor would otherwise have made is transferred to the donee.
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